Macro 2 - Tepper School of Business

Part 3: Income fluctuation problem and incomplete markets - see Chapters 16 and 17 of Sargent and Ljungqvist - Note on proof of boundedness of assets in Ayagari's model - [PDF]

Lectures:​

Lecture 1:

​We discussed McCall's model of search. For a version where the searcher does not know the distribution of outcomes (wages, prices, etc.) see Rothschild (1974)

​Discussed Rotschild's critique and Diamond's paradox

​Lecture 2:

​Briefly discussed Stigler's version of search which is non-sequential. As De Los Antos, Hortacsu, and Wildenbeest - paper here- show using data on consumers' online search, consumers do go back to examined item, i.e., they do not buy the last item visited which is what sequential search model a la McCall would prescribe.

Worked on the plain-vanilla version of the Diamond-Mortensen-Pissarides model and discussed its efficiency properties and the Hosios condition

​Lecture 3:

Went through the model of Postel-Vinay and Robin (2002).

Other papers that we mentioned: Oi and Idson's paper on size-wage premium; AKM's paper on firm effects; Sorkin's paper on compensating differentials; Taber and Veijlin's paper on different sources of wage variation

​Lecture 4:

​Started working on the Income Fluctuation Problem

Studied the case with quadratic utility function and showed the it leads to Permanent Income Hypothesis (PIH)

​Lecture 5:

​Showed that assets converge to infinity in the income fluctuations problem

Started looking at the Ayagari's model

​Lecture 6:

​Discussed Ayagari/Huggett model in SS, transitions and with shocks

​Lecture 7:

​Worked on an endogenous incomplete market model in the spirit of Kehoe-Levine, Kocherlakota and Alvarez-Jermann.